G7 yen intervention working so far, but USD/JPY may be a one-way bet

Yen is pictured on a Japanese bank note at Interbank Inc. money exchange in Tokyo Photo: Reuters

Last week, G7 surprised the market by announcing a coordinated intervention to weaken the Japanese yen when it surged to an all-time high of 76.25 against the US dollar.So far, intervention efforts have succeeded.

Background

The yen’s surge was due to speculators betting on Japanese investors repatriating money back to Japan to raise cash in the aftermath of the tragic earthquake.The concern for the G7 is that the surge in yen will hurt Japanese exporters.Moreover, policy makers want to avoid extreme volatility in the forex market.

The G7 intervention isn’t to stage a long-term weakness in the yen; rather, it’s to reverse the speculative surge in the yen last week.A main goal of the intervention is to prop USD/JPY above 80.

Since the intervention, USD/JPY hasn’t breached 80, so G7 has succeeded in this regard.

One-Way Bet

However, USD/JPY may be a one-way bet, meaning there is little upside risk and sizable downside risk.The logic is that G7 is not interested in weakening the yen beyond pre-earthquake levels, so yen depreciation risks are limited.

Meanwhile, repatriation needs and speculators can easily push USD/JPY below 80 if not for the threat of intervention from G7.

For example, after the devastating 1995 Kobe earthquake, USD/JPY plunged 20 percent in three months.

For now, speculators seem wary of G7 intervention and are respecting the USD/JPY 80 boundary.

However, intervention, even coordinated ones, have a mixed history of success. Therefore, one cannot rule out the possibility that speculators may soon re-test the resolve of G7 central banks at USD/JPY 80.